New UAE fund rules worry Gulf asset managers

Dubai, August 29, 2012

By Dinesh Nair

By introducing new rules on the sale of foreign funds, the UAE aims to shield its investors from losses as global markets struggle. But the country risks damaging its role as a hub for asset management in the region.

The rules, which will take effect on an unspecified date when they are published in the official gazette, transfer primary responsibility for overseeing investment funds to the Securities and Commodities Authority (SCA), the national financial reguator, from the central bank.

They cover both the promotion and sale of foreign funds in the UAE, and requirements for offering and launching new local funds. Collectively they mark one of the biggest changes in UAE financial regulation since the country's corporate debt crisis erupted in 2009.

The UAE is the main financial centre in the Gulf, and is used by investors from countries such as Saudi Arabia and Kuwait to channel money, so the regulatory changes could potentially affect fund flows throughout the region.

But since their release in July, the new rules have been criticised by industry experts who argue that the stringent approval process for selling foreign funds, and the fact that the regulations require fund managers to treat sophisticated institutional clients in much the same way as retail investors, could prompt asset management firms to leave the country.

"Overall the new regulations represent a missed opportunity to implement a robust regulatory regime that would have encouraged the development of the nascent funds industry in the UAE," said Kai Schneider, head of the investment funds practice in the Middle East and Africa at law firm Latham & Watkins.

The SCA's chief executive Officer Abdullah Al-Turifi, in a statement posted on its website, said the rules were a positive step that would help to boost corporate investment and attract foreign investment into the UAE.

SCA executives were not available for comment on fund managers' concerns despite repeated efforts by Reuters to contact them.

Comprehensive figures for the size of fund sales in the UAE are not available; companies view the size of their sales as professional secrets. But fund managers estimate billions of dollars of sales are conducted each year.

Activity has been boosted by the creation in the middle of the last decade of the Dubai International Financial Centre, a tax-free zone where more than 100 major international financial firms are based.

Most fund-related activity in the UAE focuses on selling foreign funds to wealthy Gulf investors, which include sophisticated institutions such as sovereign wealth funds and family firms as well as affluent individuals.

The region is therefore a major revenue driver for global mutual fund firms, hedge funds and private equity players. By contrast, local asset management firms which focus on investing their money within the Gulf have struggled to generate returns and attract investor interest.

Under the new rules, foreign funds seeking to sell products in the UAE will now have to obtain approval from the SCA, a process which fund managers expect to involve more administrative work and compliance requirements, and therefore more time and costs. This could prompt some fund sponsors to market and sell their products offshore in order to fall outside the remit of the regulations.

That could limit the SCA's ability to monitor the market and run counter to the regulations' goal of protecting investors.

"The Investment Funds Regulation may, instead of affording UAE investors enhanced protections, cause them to take their chances with foreign regulatory regimes," law firm Clifford Chance wrote in a note to its clients.

The law firm said the planned regulatory regime would resemble that of Saudi Arabia, a market which foreign fund operators have found difficult to navigate. Many Saudi investors have ended up travelling outside their country to seek investment services.

The new rules also lack clarity on who should go to the regulator to obtain approval for the fund - the asset manager itself or the distributor of the fund, which in most cases is a commercial bank operating in the UAE. This ambiguity could potentially cause legal problems and higher costs.

"I think that one of the questions remains - from reading the paper - is who has responsibility for gaining fund approval," said Daniel Rudd, HSBC Asset Management's Middle East & North Africa head.

Rudd said HSBC's asset management arm currently distributed about 35 funds in the UAE, and it was not clear who would shoulder the burden of fees associated with SCA approval.

The new regulations do not apply to insurance products, private investment portfolios and employee benefit schemes in the UAE. Retail investors in the UAE rely heavily on such products, so excluding them from the regulations worries some industry participants.

"The banks could end up selling insurance-linked products as they are not subject to the regulations. That's something we have brought to the notice of the SCA," said a senior asset management executive, declining to be named because of the sensitivity of the matter.

Funds based in the DIFC will be subject to the new rules in the same way as other funds in the UAE, and this could reduce the attractiveness of the DIFC for foreign firms.

Under the DIFC's regime, regulatory requirements have been softer, and therefore less costly, for fund sales to big professional clients than they have been for sales to retail investors. Fund managers fear that under the new national rules, they will be required to treat both kinds of investors in much the same way, raising costs.

"The DIFC will likely find it harder to lure fund sponsors and managers to set up shop in the free zone," Latham & Watkins' Schneider said.

Competing financial hubs in the region, such as the Qatar Financial Centre, might benefit by attracting companies from the DIFC.

Many fund managers, noting that the new rules were adjusted after they were originally proposed about a year and a half ago, are still hopeful that there will be further revisions which meet some of the industry's concerns.

"If we look at the draft rules from last year, some of the provisions which were of major concern to the industry have been amended or removed," Rudd said.

"If you have a regulator who is willing to listen to concerns, it's always a positive factor." - Reuters